Insurance Companies Feeling Pressure to Cover Financial Losses in the Wake of COVID-19
April 28, 2020
By Lawrence C. Weiner and Boris Peyzner
As weeks turn to months, businesses continue to suffer massive losses as a result of state governments’ stay at home orders. One of the most common questions we are receiving is “will my business interruption insurance cover these financial losses?” Our last alert addressed this issue, but since then, state legislatures have put tremendous pressure on insurers to cover these mounting losses, and a number of lawsuits have been initiated against insurers.
In recent weeks, six state legislatures – Ohio, Massachusetts, New York, Louisiana, Pennsylvania, and Southern Carolina – have followed New Jersey by proposing legislation which would require insurers to cover losses under business interruption coverage. Aside from this legislative pressure on the insurance industry, restaurants across the nation have begun initiating litigation against insurance companies seeking coverage. In New Jersey, on April 3, 2020, a Red Bank, New Jersey restaurant, Restaurant Nicholas, filed suit against Liberty Mutual Insurance seeking to recoup its losses resulting from Governor Murphy’s Executive Order Nos. 105 and 107, which shut down non-essential businesses and limited restaurants to takeout or curbside orders. Similarly, on April 20, 2020, a Summit, New Jersey restaurant, Fiorino Ristorante, filed a class action against Chubb LTD and Indemnity Insurance Company of North America, seeking to recover its business losses.
Both suits challenge the insurers’ position that the insured did not sustain a physical loss or damage to their property, and/or the 2006 ISO Exclusion for viruses bars coverage (see our earlier alert for details on the 2006 ISO Exclusion).
In an effort to counteract the physical loss limitation, Fiorino Ristorante alleges that if Chubb, as drafter of the policy “had wished to exclude from coverage as ‘physical loss or damage’ loss of use of property that has not been physically altered, it could have used explicit language stating such a definition of ‘physical loss or damage.’ It did not do so.” Conversely, Restaurant Nicholas alleges that “the virus is physically impacting public and private property and causing physical loss and damage elsewhere resulting in issuance of [the relevant Executive Orders] and triggering coverage under Civil Authority. Any effort by Liberty Mutual to deny the physical impact and physical loss and damage to property constitutes potentially fraudulent misrepresentation that could endanger policyholders and the public.”
To address the ISO Exclusion related to viruses, Fiorino Ristorante alleges that the losses were caused by the “precautionary measures taken by the State of New Jersey to prevent the spread of COVID-19 in the future, not because coronavirus” was found at Fiorino Ristorante. On this issue, Restaurant Nicholas alleges that the ISO Exclusion violates public policy and cites New Jersey’s proposed Bill No. 3844 in support of its argument.
It remains to be seen how insurers will react as more lawsuits are filed. A good predictor, however, is to revisit insurance claims filed after Hurricane Katrina. After this natural disaster, insurance companies initially declined to pay losses, but subsequently relented after mounting public and political outcry. With the passage of each day, it is likely that more state legislatures will introduce laws that will require insurers to cover these COVID-19 losses, putting even more pressure on insurers to pay on business interruption claims. At the same time, the Federal Government may get involved through a proposed program called the “Pandemic Risk Insurance Act of 2020.” This program, which would have a funding cap of $500 billion in a calendar year, would back-stop insurance carriers when their total losses exceed $250 million.